More financial support is on the way for SMEs and startups that focus on innovation and research. What is on offer, who can access it and when does it start? Financial journalist Rachael Revesz finds out more.

One month into lockdown, the UK government announced additional financial support for small and medium sized enterprises (SMEs) and start-ups. Chancellor of the Exchequer Rishi Sunak unveiled a £1.25 billion fund on 20 April that is designed to get cash in the hands of entrepreneurs who run high-growth, innovative companies as well as firms that are focused on research and development (R&D).

The new £1.25bn is split into two parts:

  • A £500 million investment fund named the "Future Fund", for high-growth start-ups and administered by the British Business Bank. The fund is initially open until the end of September.
  • £750 million for R&D firms channelled through Innovate UK, the government funded national innovation agency.

This new financial package is designed with start-ups and scale-ups in mind, companies in their early stages which tend to prioritise growth over profit. This type of aid was needed because the existing SME schemes, such as CBILS, are for companies with a history of profits. A lot of start-ups, particularly in tech, prioritize growth over profitability, with a plan to make money further down the road, so are not currently profitable. These new, fast moving firms may even be loss-making at the moment, and typically rely on investment to grow. This is where the £1.25 billion comes in.

The Future Fund

The Future Fund is designed to help small, innovative companies that aim to grow as quickly as they can, with a view to making profit at a later stage. These companies tend to raise funding from venture capital firms, angel investors, even family and friends. Key points on the fund:

  • A £500 million pot of "convertible" loans for high-growth firms that need continued investment in order to grow and scale.
  • Loans are between £125,000 and £5 million, with private investors matching the government’s commitment.
  • The government provides £250 million, with private investors providing the other £250 million.
  • The loans may be a suitable option for businesses that rely on equity investment and cannot access CBILS.

What are the headline terms of Future Fund loans?

  • If the loan is not repaid, the government will take an ownership stake in the company. The loan becomes equity, hence why it is called a convertible loan.
  • The loan will become equity if the company does not pay it back before the loan matures, or on their next qualifying funding round.
  • Once the loan becomes equity, the owners and other shareholders’ stake in the company will be diluted by the government’s stake.
  • The minimum, non-compounding annual interest rate is 8%, to be paid when the loan expires.
  • The loan will mature after a maximum of 36 months.
  • More terms and conditions and details of the equity conversion process, can be found on the government website.

Am I eligible for a loan?

  • Eligible applicants must be unlisted, registered in the UK and have raised at least £250,000 in equity investment from third party investors in the last five years.
  • The company must have a "substantive economic presence" in the UK.
  • A company must demonstrate that it needs the money and that it will be useful.
  • If the applicant is a subsidiary, only a UK-based parent company can apply.
  • Applicants will be subject to money laundering and fraud checks.
  • More criteria will be published on the government website soon.

What can I use the money for?

The loan is designed for working capital purposes, such as paying staff, creating a product or managing inventory, and can’t be spent on repaying debt, paying bonuses or dividends, or paying consultants or advisers.

How can I apply?

  • Applications will go through the British Business Bank, starting in May. Check the British Business Bank website for exact dates and further details.

Support for R&D firms

For research and development-intensive SMEs, £750 million is on offer through an expansion of Innovate UK’s grants and loans scheme.

Typical awardees will be UK-resident and ambitious businesses that are struggling with cash flow issues, from all sectors of the economy, as well as businesses who have generated new ideas and concepts in the past few weeks and who need help to realise them.

  • The pot is made up of loans and grants administered by Innovate UK, the government’s national innovation agency.
  • £200m of grants will be set aside for Innovate UK’s existing customers who might need additional and immediate support. Grants are normally offered a quarter in arrears, but they will be brought forward.
  • These customers should expect to hear from Innovate UK directly.
  • £300m is also available in continuity innovation loans and grants (split roughly 50/50) to help firms who were on track pre-Covid 19 to grow and scale during and after the crisis.

What about businesses that are not Innovate UK customers?

  • In addition, £211 million is set aside for about 1,200 new customers who can apply for a grant of up to £175,000.
  • As is typical with Innovate UK, these grants will be awarded if you win a competition, with the process taking around a month instead of the usual 24 weeks.

Am I eligible for a grant?

  • To qualify for a grant of up to £175,000, the company must be less than three years old and not have received any government funding before.
  • If you are awarded a grant of up to £50,000, it will be awarded upfront. If it is larger, half the grant will be awarded upfront.

How can I apply?

  • Applications are via the UK Innovate website
  • The Government has said that the first payments will be made by mid-May. Check the UK Innovate website for more information.

What other support is available for innovative SMEs?

The above is intended as general information and does not constitute advice in any way. You should take independent advice if you have any questions about your specific circumstances.

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